U.S. farm bill may halt Brazil cotton retaliation...for now

A new U.S. farm bill that reduces subsidies for cotton growers may stop Brazil from immediately slapping $830 million in trade sanctions on Washington.

A final solution to the decade-old dispute remains elusive, however, and Brazilian retaliation is still possible if the two countries' disagreements are not resolved over time, business groups and consultants from both countries told Reuters.

The U.S. Senate's approval on Tuesday of the farm bill was supposed to end the trade row, easing political and trade tension between the hemisphere's two biggest countries. Ties worsened in late 2013 over revelations Washington spied on President Dilma Rousseff's communications.

The bill, though, fails to meet all of the demands from Brazilian cotton producers and creates a new insurance scheme for U.S. growers, which some fear may push down prices in much the same way as the subsidies did.

"This is like a Brazilian soap opera, with every new episode, things get more complicated," said Diego Bonomo, executive manager of foreign trade with Brazil's Confederation of Industries, adding that the U.S. bill had gone some way in breaking this pattern.

"This is a step in the right direction, but we still don't have a definitive solution," said Bonomo.

Brazil won a challenge against U.S. cotton subsidies at the World Trade Organization in 2004 giving it the right to impose $830 million in sanctions against U.S. products. Brazil agreed to suspend the penalty if the United States paid into an assistance fund for Brazilian cotton farmers.

That agreement, under which the United States paid Brazil $147 million a year since 2010, was supposed to last until Washington passed farm legislation eliminating U.S. cotton subsidies.

The United States stopped paying the monthly compensation in October over budget disagreements in Congress, prompting the Brazilian government to prepare for retaliation that could come as early as March.

Insurance Worries

The farm bill, which is expected to be signed by President Barack Obama this week, eliminates subsidies on cotton production and grants the U.S. Agriculture Department powers to negotiate with Brazilian authorities changes to export loans known as export-credit guarantees.

The new crop insurance program is an important step toward a final resolution of the long-standing case, the National Cotton Council of America's chairman Jimmy Dodson said in a statement earlier this week.

Even so, critics say the creation of the insurance, which would almost entirely cover any losses for U.S. cotton farmers, could scuttle a deal.

"I'm not really hopeful at this point in time that the farm bill will be sufficient to put this debate to rest," said Burleigh Leonard, a senior consultant with Prime Policy Group in Washington. "If this dispute is not resolved and Brazil moves ahead with retaliation that will certainly exacerbate tensions between both countries."

The Brazilian Foreign Ministry said in an e-mail response to Reuters that the government is currently analyzing the bill to make sure it complies with WTO rules.

Brazilian cotton producers will keep pressuring the government to oppose legislation "that creates even more market distortions than the previous one," said Renata Amaral, a consultant with the country's cotton growers association.

Although Brazil is nearly ready to retaliate by raising tariffs on U.S. products and suspending intellectual property rights on drugs, seeds, movies and other products, authorities have been very cautious.

Andre Rizzo, the executive director of the government's foreign trade commission, told Reuters last month that Brazil will "need to be careful because you don't want to affect the business environment. Nobody benefits from retaliation."

The global cotton industry has been hit hard by four seasons of excess output and as textile mills increase their use of lower-cost, synthetic alternatives.